Arguments for and against total debt relief for Heavily Indebted Poor Countries (HIPC)

The problem of Third World Debt has been a talking point in international political meetings for more than half a century now.  The new world order that had emerged with the end of Second World War had divided the world into three distinct political groups.  The first was led by the United States and its allies, the second comprised of the former Soviet Union nations and the rest belonged to the Third World – a conglomeration of economically and politically backward nation-states.  While the first two groups have lost their exclusiveness with the end of the Cold War, the block of poorest nations have essentially remained stagnant during this period (Loewenberg, 2005, p.17).  Not only do these nations face internal challenges but they also have to contend with massive amounts of debt that they owe to developed countries.  This issue will be the focus of the rest of the essay, which will elaborate on the merits and demerits attached to the policy of totally writing-off the debt owed by the most impoverished of Third World nations.

Firstly, there is a strong case to be made for total debt relief from a post-colonial reparation perspective.  Most countries that presently fall under the Heavily Indebted Poor Countries (HIPC) category are former colonies for European imperialism.  The HIPC group is predominantly comprised of countries from Africa and Asia.  A primary reason for their prevailing impoverished economy was the exploitation suffered by them during the colonial period.  Similarly, the prevailing political chaos in most of these countries is partly due to the abrupt transition of power from the imperialists to the local elite – a transition that did not make provisions for the establishment of democratic institutions and processes.  The HIPC Initiative conceived and proposed by the World Bank and its agencies is one of the methods through which Third World Debt could be reduced.  In other words, the initiative is intended to “release resources for poverty reduction, increase incentives for reforms, and remove a deterrent for both domestic and foreign investors” (Cappelen, et. al, 2007, p.69)).  According to the World Bank, as of June 2006 “nominal debt service relief of more than US$59 billion has been approved for 29 countries through the HIPC Initiative, reducing their Net Present Value of external debt by approximately two-thirds. Of these countries, 19 have reached the completion point and have been granted unconditional debt service relief of over US$37 billion.” (Cappelen, et. al, 2007, p.70)

While statistics such as these sound promising, the success of the program would depend on how the availed debt-relief translates into meaningful economic development in the years to come.  But as of now, the World Bank’s Comprehensive Development Framework has not charted out viable plans for all aspects of development.  Although the HIPC Initiative is not intended to provide complete debt relief, its proper execution is supposed to bring about substantial changes to the economies of indebted countries, thereby significantly alleviating poverty in these countries (Loewenberg, 2005, p.18).  Hence, the issue is not whether total debt relief is good or bad, but whether proposals toward that end will be executed in a systematic and effective manner.  Further, in September of 1999, a review process was carried out to enhance the HIPC Initiative. Under the revised plan, the sustainability targets were lowered, the eligibility criteria for debt-relief made more flexible and specifies “front-loaded debt relief, and a specific link between debt relief and poverty reduction” (IMF report, 2002). Particularly, debt-sustainability targets were reduced in order to provide greater debt relief for qualifying countries and also to increase the number of countries that can qualify for debt relief.  Hence,

“debt relief will now be aimed at reducing the net present value of debt to 150 percent of exports or, for those eligible under the fiscal window, 250 percent of government revenue, whichever provides greater debt relief to the recipient country. Deeper debt relief is likely to have several advantages. First, it is hoped that additional debt reduction will free resources for poverty reduction and other important objectives set in the country’s Poverty Reduction Strategy Paper. Second, the more ambitious targets of the enhanced HIPC Initiative will provide a greater safety margin for the achievement of debt sustainability and increase the chances of a permanent exit from the need for debt rescheduling. This in turn will improve the chances of future economic success by strengthening incentives for economic reform and private investment and reducing moral hazard.” (IMF report, 2002)

The above argument sounds reasonable in terms of its economic rationale.  But there is a more fundamental question that needs to answered, namely, whether this program is consistent with a view of justice commonly known as liberal egalitarianism. Under this perspective of justice “agents should be held responsible only for free and informed choices, which in an international context can be understood as saying that a population should be held responsible only for policy choices to which they have given their informed consent” (Cappelen, et. al, 2007, p.71). Liberal egalitarianism provides a suitable framework of analysis for discussing the merits and demerits of debt relief programs, for it mixes two ethical principles that are considered to be fundamental by most people: “first, the egalitarian ideal that inequalities resulting from factors outside an agent’s control should be eliminated, and second, the liberal ideal that inequalities resulting from factors under an agent’s control should be accepted” (Rasmussen, 2007, p.254).  But unfortunately, the HIPC Initiative is found to be inconsistent with these principles of liberal egalitarianism.  The ethical objections made against programs such as the HIPC Initiative and total debt relief can be summarized thus:

“If justice simply consisted in equalizing income, then this would imply that the HIPC Initiative is unfair. The ideal of liberal egalitarian ethics is not simply to equalize income, however, but also to hold agents responsible for factors under their control. Finally, the HIPC Initiative, and a single-minded focus on debt relief more generally, can be seen as unfair because it contributes to a distribution of total aid that is unfair. The correlation between foreign aid and debt relief implies that different sources of poverty are treated very differently. Poverty that is due to sovereign debt is to a large extent eliminated, while poverty that is due to other sources is to a large extent accepted.” (Cappelen, et. al, 2007, p.71))

A more recent development in eliminating Third World Debt is the Multilateral Debt Relief Initiative (MDRI), which was forwarded by G8 countries in June of 2005. This measure was supported by all the G8 Heads of State at the Gleneagles Summit held on July of the same year.  A Development Committee was setup to coordinate the process of debt relief alongside international institutions like the IMF, ADF and the IDA.  The MDRI purports to fulfil two objectives.  These are “(i) deepening debt relief to HIPCs by providing 100 percent cancellation of eligible debt owed to ADF, IDA, and IMF for 42 low-income countries worldwide, including 33 eligible regional member countries (RMCs) that reach the completion point; and (ii) compensating ADF (African Development Fund) and IDA for the debt cancellation in order to preserve the long-term financing capacity of both institutions” (Hayman, 2005, p. 451).  Again, as in the case of the HIPC Initiative, the MDRI plan is much welcome in the context of eliminating Third World Debt.  There is a strong case to be made for the approval of this measure by the G8 countries.  Considering the huge disparities in wealth and standard of living between the advanced nations and the HIPC, it is only fair that the former group lends a helping hand to the less privileged.  Taking into account the historical injustices that were incurred under European colonialism, these debt-relief efforts are only nominal compensations for the deep-rooted damage suffered by the HIPC. Another positive aspect of total debt relief programs such as the HIPC Initiative and the MDRI is their adoption of democratic processes (Hayman, 2005, p. 451).

While total debt relief programs have plenty of merits attached to them, certain aspects of them require a cautious approach.  In the case of MDRI, for example, there is risk of Non-concessional Borrowing and Capacity Building in the benefiting nations.  MDRI debt relief and grants under ADF-X have significantly reduced debt burden ratios in the MDRI beneficiary nations, and this has helped foster fiscal space and has increased the potential for future borrowing by these beneficiaries from various financial institutions.  Therefore, some creditors in emerging markets are forthcoming in providing requisite finance, confident in the knowledge that,

“with MDRI relief and the prospect of future ADF grants, the country could cover the accumulating debt service. In the circumstances, concessional lenders (ADF, IDA, other MDBs) face the risk of these emerging market and other non-concessional lenders indirectly obtaining financial gain from their grants and MDRI debt relief, without paying for it. There is therefore the need to address this challenge to ensure that the debt burdens of the 33 MDRI-eligible RMCs do not become unsustainable again. Strengthened management of debt and public finance in the 33 potential MDRI beneficiaries will, therefore, be needed through capacity building to prevent a new resurgence of unsustainable debt burdens in the medium and long term.” (African Business, 2007, p.32)

Debt relief programs such as the HIPC Initiative and the MDRI are also viewed with caution by non-governmental organizations.  Chief complaints against these plans include the protracted waiting period for availing debt relief, that it does not address poverty-reduction adequately, etc.  Other commentators chastise the multilateral agencies for requiring stringent fiscal discipline as a mandatory condition for debt relief, thus indirectly preventing government spending on social services. Another crucial question that these programs have not yet answered is this:  “Rather than simply deepen the level of relief and modify the policy framework for existing HIPC nations, why not also broaden the program to encompass additional highly indebted countries?” (Rasmussen, 2007, p.255) This is a legitimate question considering the fact that many countries that do not qualify for debt-relief have urgent need for funds.  For example, Peru is a classic case, for it owes more than $30 billion to foreign creditors – a sum that is equal to the combine debts of seven of the debt-relief qualified members under HIPC.  Problems and limitations such as these suggest that existing debt-relief programs are not adequate for handling all the financial difficulties of the under-developed world.  Obviously, there are sufficient funds available to broaden the scope and reach of debt-relief programs.  What is lacking is the political will from the G-8 leadership to carry out these changes. Given these drawbacks associated with existing debt-relief programs, one can only come to the conclusion that an inadequate debt-relief program is better than no debt-relief at all.  To this extent, they must be supported and encouraged, but many changes have to be incorporated for these measures to be truly effective. (Lozada, 2000, p.9)  While highly indebted nations should be granted total debt relief, those nations which are deemed too big to qualify at this point in time should also be granted relief.

Works Cited:

Cappelen, Alexander W., Rune Jansen Hagen, and Bertil Tungodden. “National Responsibility and the Just Distribution of Debt Relief.” Ethics & International Affairs 21.1 (2007): 69+.

Damle, Jai. “The Odious Debt Doctrine after Iraq.” Law and Contemporary Problems 70.4 (2007): 139+.

“Developed Countries’ Commitment at G8.” Presidents & Prime Ministers July 2000: 32.

Hayman, Rachel. “Munyae Mulinge and Pempelani Mufune (Eds), Debt Relief Initiatives and Poverty Alleviation: Lessons from Africa.” Africa 75.3 (2005): 449.

“How Can the Poorest Countries Catch Up?.” World Economic Outlook : 113.

Loewenberg, Samuel. “That Other Forum: The Agenda at the World Social Forum Was-Well, 268 Pages Long. but the Road from Davos to Porto Alegre Appears to Be a Long One.” The American Prospect Mar. 2005: 17+.

Lozada, Carlos. “DEBT RELIEF – How Poor Is Poor Enough?.” Commonweal 25 Feb. 2000: 9.